Quick Summary
1. Lehman Brothers filed for bankruptcy
2. Merrill Lynch (MER) has agreed to be bough out by Banc of America.
3. The Federal Reserve has widened the collateral it accepts for loans to securities firms.
4. The Fed also has boosted its program for lending Treasuries to bond dealers by $25 billion, brining it to $200 billion
5. A group of 10 banks including JP Morgan (JPM), Goldman Sachs (GS) and Citigroup (C.N) have formed a $70 billion fund to ensure market liquidity
6. The European Central Bank and Bank of England pumped emergency funds into their financial systems this morning as did the central banks of Switzerland and Australia.
7. The Federal Reserve meets tomorrow and is speculated to make either a 50 or 75 basis point cut. It may even move today if warranted.
8. AIG Group (AIG) is seeking a $40 billion bridge loan from the Federal Reserve after weekend talks failed to raise capital for the company.
A history making weekend for the U.S. financial services sector as Lehman Brothers (LEH) said it would seek bankruptcy protection and Bank of America (BAC) said it would acquire Merrill Lynch (MER) for 0.8595 of a share of BAC for each share of MER. The transaction values Merrill at U$24.75 based on BAC's current share price in pre-market trading.
Lehman's filing threatens the Credit Default Swap (CDS) market as nobody is really sure how to settle or unwind these positions. Lehman ranked as the seventh-largest credit derivative counterparty by Fitch Ratings in a survey released last year. Scotia's fixed income strategist believes there are about U$1 trillion worth of counterparty transactions that flow through Lehman. Reuters noted the private nature of the market, however, makes the size of its books impossible to quantify.
The next shoe to fall could very well be American International Group (AIG). The shares are down 50% again this morning after they were pummeled last week on concerns about ratings downgrades that would require the company to post additional collateral. A significant portion of AIG Financial Products unit guaranteed investment agreements and financial derivatives transactions include provisions that would require the company to post additional collateral or repay its positions. According to a Financial Times article, it was estimated that a downgrade of AIG's long-term senior rating to A1 by Moody's and A+ by S&P would permit counterparties to make additional calls for up to U$13.3 B of collateral. AIG apparently turned down a capital infusion from a group of private equity firms led by JC Flowers because of an option tied to the offer that would give these investors control of the company. The press is saying AIG has asked the Federal Reserve for a U$40 B bridge loan. Some analysts think the Fed will extend them the necessary credit to stay afloat.
We do not believe this is the beginning of the end of troubles in the U.S. and global financial system. Banks are likely to hoard more cash and further reduce their willingness to lend money to consumers and businesses. This will delay a recovery in the housing market and prolong the downturn in the U.S. economy. Former Fed Governor, Alan Greenspan said this is a once in century event, the worst he has seen in his career. He believes the crisis still has a way to go and will be a corrosive force until the price of home in the U.S. stabilize.
1. Lehman Brothers filed for bankruptcy
2. Merrill Lynch (MER) has agreed to be bough out by Banc of America.
3. The Federal Reserve has widened the collateral it accepts for loans to securities firms.
4. The Fed also has boosted its program for lending Treasuries to bond dealers by $25 billion, brining it to $200 billion
5. A group of 10 banks including JP Morgan (JPM), Goldman Sachs (GS) and Citigroup (C.N) have formed a $70 billion fund to ensure market liquidity
6. The European Central Bank and Bank of England pumped emergency funds into their financial systems this morning as did the central banks of Switzerland and Australia.
7. The Federal Reserve meets tomorrow and is speculated to make either a 50 or 75 basis point cut. It may even move today if warranted.
8. AIG Group (AIG) is seeking a $40 billion bridge loan from the Federal Reserve after weekend talks failed to raise capital for the company.
A history making weekend for the U.S. financial services sector as Lehman Brothers (LEH) said it would seek bankruptcy protection and Bank of America (BAC) said it would acquire Merrill Lynch (MER) for 0.8595 of a share of BAC for each share of MER. The transaction values Merrill at U$24.75 based on BAC's current share price in pre-market trading.
Lehman's filing threatens the Credit Default Swap (CDS) market as nobody is really sure how to settle or unwind these positions. Lehman ranked as the seventh-largest credit derivative counterparty by Fitch Ratings in a survey released last year. Scotia's fixed income strategist believes there are about U$1 trillion worth of counterparty transactions that flow through Lehman. Reuters noted the private nature of the market, however, makes the size of its books impossible to quantify.
The next shoe to fall could very well be American International Group (AIG). The shares are down 50% again this morning after they were pummeled last week on concerns about ratings downgrades that would require the company to post additional collateral. A significant portion of AIG Financial Products unit guaranteed investment agreements and financial derivatives transactions include provisions that would require the company to post additional collateral or repay its positions. According to a Financial Times article, it was estimated that a downgrade of AIG's long-term senior rating to A1 by Moody's and A+ by S&P would permit counterparties to make additional calls for up to U$13.3 B of collateral. AIG apparently turned down a capital infusion from a group of private equity firms led by JC Flowers because of an option tied to the offer that would give these investors control of the company. The press is saying AIG has asked the Federal Reserve for a U$40 B bridge loan. Some analysts think the Fed will extend them the necessary credit to stay afloat.
We do not believe this is the beginning of the end of troubles in the U.S. and global financial system. Banks are likely to hoard more cash and further reduce their willingness to lend money to consumers and businesses. This will delay a recovery in the housing market and prolong the downturn in the U.S. economy. Former Fed Governor, Alan Greenspan said this is a once in century event, the worst he has seen in his career. He believes the crisis still has a way to go and will be a corrosive force until the price of home in the U.S. stabilize.
No comments:
Post a Comment